Be Compliant Or Beware!

The primary focus of the Directors and the Management of the Company is generally on the business operations, expansion and growth opportunities etc. However, while pursuing their business goals, very often they forget that compliance form a very integral part of any business practice of any organization.

Taking into cognizance the penal provisions which have been introduced by the Companies Act, it is imperative that the management of the company should be aware of the various compliance as introduced from time to time and take active participation in compliance as noncompliance is hazardous for the Company as well the Directors. The Companies Act also provides certain duties of director which are to be fulfilled by the Director, in order to avoid penalties as specified in the provisions.

As per Section 164, if a Director absents himself from all the meeting of the Board of Directors held during the period of 12 months then he attracts disqualification under the Act. Hence it is mandatory for all the Directors to attend at least one board meeting in the year by physical presence or video conferencing.

Also, if the Director fails to disclose its interest in Form MBP-1 under Section 184 of the Companies Act, 2013 or contravenes the provisions of this section, the director becomes disqualified as per the provisions of Act.

Recently there are several major changes in the Companies Act, 2013 introduced by the Ministry of Corporate Affairs ('MCA'), India for strengthening the Corporate Governance in India. Some of the changes are listed here below:

a. KYC of all the Directors

b. Surrender of DIN by the Directors

c. Disqualification for Appointment of Director

d. Declaration to be given by the Ultimate Beneficial Owner

An elaborate on the aforesaid compliance here under :

a. KYC of all the Directors: MCA vide notification dtd. 05th July 2018 has amended Companies (Appointment and Qualification of Directors) Rules, 2014 by inserting Rule 12A as follows :

“Every individual who has been allotted a Director Identification Number (DIN) as on 31st March of a financial year as per these rules shall submit e-form DIR-3-KYC to the Central Government on or before 30th April of immediate next financial year. Provided that every individual who has already been allotted a Director Identification Number (DIN) as at 31st March, 2018, shall submit e-form DIR-3 KYC on or before 5th October, 2018.

In India, approx. 50 lac individuals were allotted DIN Numbers and all of them including disqualified directors were required to file e-form DIR-3 KYC with the Central Government out of which 33 lac are considered to be active. Nearly 21 lac individuals have failed to comply with the new requirements with the extended deadline ended on 15th September 2018.

Subsequently, the due date was extended upto 5th October, 2018 for F.Y 2018-19 with an additional Fees of INR 500/-.

Ministry has completed the process of deactivating the DIN Numbers of non-compliant directors and their status is now showing as “Deactivated due to non-ling of DIR-3 KYC”.

After 5th October, 2018 the non-compliant Directors can activate their DIN Numbers paying a fees of INR 5,000/-.

As per the notification, the following were the basic requirements of the KYC:

- DSC

- Personal Mobile Number

- Personal Email ID

In case of unavailability of these, the directors could not proceed with KYC. However, in complying with KYC of Directors there were several hurdles which were encountered, like - mismatch of name with the PAN Database, personal email - ID and contact number of directors were used for OTP purpose. In case of foreign directors not residing in India, their personal mobile number with the ISD Code were used. Several times, OTP on mobile number or e-mail ID were not received on time or there were problem with the time zones of the Country or getting the availability of the Directors for OTP purpose.

b. Surrender of DIN by the Directors: Ministry has further notified on the MCA Portal that individual who is in possession of duplicate/multiple DINs, he can retain the oldest DIN only. DINs obtained later have to be surrendered. Please note that on approval of form DIR-5, all existing/erstwhile associations of the surrendered DIN shall be automatically mapped to the retained DIN.

In respect of an individual with a single DIN, if it is/was once associated with any LLP or Company, it is NOT eligible for surrender.

c. Disqualification for Appointment of Director : There are many cases where the Directors are disqualified due to non -filing of financial statements or annual returns for any continuous period of three financial years. Hence in such cases all the Directors on the Board are disqualified and even if a new appointment is made on the Board such director could also be attract the Disqualification. Therefore it would be tough time for the Company without Directors.

Hence to avoid such situation Ministry has amended the s. 164 to insert a clause that where a person is appointed as a Director of the Company which is in default of non – ling of Financials of the Company for a continuous period of 3 years shall not incur the disqualification for a period of six months from the date of his appointment.

d. Declaration to be given by the Ultimate Beneficial Owner: This is a newly inserted provision, s. 90 Companies Act, 2013 regarding significant beneficial owners in the Company and has also introduced Rules named as the Companies (Significant Beneficial Owners) Rules, 2018.

Meaning Significant Beneficial Owner means an Individual holding ultimate beneficial interest of not less than 10% but whose name does not appear in the Register of Members of the Company as the holder of Shares.

And for the purpose of this section it is hereby clarified that instruments in the form of global depository receipts, compulsorily convertible preference shares or compulsorily convertible debentures shall be treated as shares.

Further beneficial interest in a share includes directly or indirectly, through any contract, arrangement or otherwise, the right or entitlement of a person alone or together with any other person to:

I. Exercise or cause to be exercised any or all of the rights attached to such share; or

ii. Receive or participate in any dividend or other distribution in respect of such share.

And where no natural Person is identified then the declaration should be taken from the Senior Managing Officials.

From the following instances, the meaning of beneficial owners becomes exceedingly clear -

Case1 : Company A is a 100% Subsidiary of Company B. And Company B has 3 Shareholders E, F, and G which are holding equally i.e. 33.33% each.

In these Case Company A will check that the Shareholding of E, F and G is above 10% and take the Declaration in Form BEN -1 from the Holders of Company B as they are the Ultimate Beneficial Owners of the Company.

Case 2: Company A is a Subsidiary of Company B. Company B Holds 70% shares and rest 30% are hold by an Individual D.

Further the Shareholder of Company B is also a Body Corporate i.e. Company C. Hence in these we will check the Shareholding Pattern of Company C.

Suppose there are 3 Shareholders in Company:

X holding 80% Shares

Y holding 10% Shares

Z holding 10% Shares

Hence in this case we will take the weighted Average Percentage

For X = 80*70%=56%- Hence he will give the Declaration

For Y= 10*70%=7%- Hence he will not give the Declaration

For Z=10*70%=7%- Hence he will not give the Declaration

Case 3- Company A is a Subsidiary of Company B. Further Company C is the Shareholder of Company B.

And in this case no natural person is identified hence Senior Management of Company C will give the Declaration in BEN -1.

Further as MCA has received many concerns regarding the BEN Forms from the stakeholders. Hence keeping in view the stakeholders concerns MCA vide Circular dtd. 10.09.2018 has decided to revise the Form BEN-1 and the same would be updated soon.

Takeaway : The new disclosure regimes which are introduced by the Ministry only demonstrates the intent and the need of the government to ensure that companies are not misused to carry on illicit activities including money laundering etc. and carry on their activities in the most transparent manner in line with the regulatory framework compliance.